Berlin Residential Investment Market News Update on Berlin s Rental Housing Market May 2009 The Berlin News Dwindling Housing Supply Tenants beware: Berlin s housing market could develop a bottleneck within the next few years, or so the findings of a survey compiled by the Eduard Pestel Institute suggest. According to the survey, the city will need about 100,000 additional apartments by 2015. That equals 5.4 percent of the current stock. By 2025, demand for additional housing will actually have quadrupled, as 390,000 new apartments will be needed. The rise in demand will become problematic insofar as it is not met by a corresponding supply, according to the expert forecasts. Mathematically speaking, more than 20,000 units would have to be raised in Berlin each year. In reality, the order books of contractors in Germany s capital are anything but filled. Only about 6,300 building licenses for new apartments were issued in 2008, according to figures of the State Statistical Office. If building activities continue to linger on this level, there will be a shortage of nearly 300,000 apartments by 2025. The predicted increase in housing demand is explained, on the one hand, by demographic factors. Underlying the survey is the assumption that both the population and the number of households in Berlin will rise. Instead of today s 1.88 million, there will be more than two million apartments by 2025. On the other hand, many existing apartments are unsuitable for redevelopment and need to be rebuilt from scratch. The Pestel Institute grouped nearly 200,000 units with this category. The reasons for this categorisation can be anything from poor structural quality to obsolete floor-plans, a precarious maintenance status, or energyrelated flaws. Redevelopment is particularly unprofitable for apartments from the 1950s through 1970s. For prospective tenants, the dwindling housing supply might develop into a serious problem. Owners, by contrast, can look forward to rising rent revenues. The concerns about a housing bottleneck are shared by Investitionsbank Berlin (IBB) in its Housing Market Report. Since the rise in the number of households is paced by pensioners and young people more than other groups, the bracket of low-priced apartments is likely to be the first to develop a shortage, according to the IBB. Jones Lang LaSalle (JLL), by contrast, has identified high-end apartments as the bracket where additional demand is highest. This assessment is based on the observation that rent rates for high-end apartments climbed faster during the second semester of 2008 than the rent rates for simple units. Editorial This is the first issue of Berlin Residential Investment Market, a regular newsletter that we launched in order to brief you on the latest developments in the market for rental homes and apartments in Germany s capital. It is edited by Dr. Zitelmann PB GmbH, Germany s leading consulting company for the positioning and communications of real estate companies, and by the investment brokerage Michael Schick Immobilien. The idea underlying this newsletter is to share with our readers the market know-how we have acquired over many years of high-key activities on Berlin s residential real estate market. In addition to the latest market figures, Berlin Rental Housing will serve as platform to communicate personal impressions and experiences from the rental housing market, to profile micro locations, and to highlight specific projects. If you take an interest in Berlin s market for rental housing, do get in touch with us at +49 (0)30 / 254 93 167 or info@berlinerzinshaeuser.de. Jürgen Michael Schick Dr. Rainer Zitelmann
Berlin Residential Investment Market Issue 1 / May 2009 2 Column Is This the Right Time? By Dr. Rainer Zitelmann The last time I bought a multifamily home in Berlin was exactly five years ago. I was lucky because both prices and interest rates had hit rock bottom. In the years that followed, I watched prices for multifamily homes in Berlin climb at a monthly rate almost. This house I bought, located in a fair location in Berlin-Neukölln, sold at a multiple of seven times the annual rent, and was financed at a rate below four percent with a ten-year fixed-interest period on top of everything else. Naturally, there have since been investments whenever apartments had to be re-let, putting in new bathrooms, new wiring, or similar. And of course letting in a district like Neukölln is not quite as easy as it is in Steglitz, Mitte, or Charlottenburg. It was the very affordable cost price that made it an all around worthwhile investment. And today I could probably sell the property for a multiple of eleven. I prefer to hang on to it though because I would not quite know what to do with the cash. After this acquisition, I quit buying property for five years. Anglo-Saxon and Scandinavian investors were outbidding each other, driving up the prices. Buildings that used to sell at multiples of nine were suddenly bought for 12 or 13 times the annual rent. And real estate formerly offered for multiples of 14 times now changed hands for 18 times or more. Last year, I began to hope that the situation on Berlin s rental housing market would calm down. Financial investors had more or less withdrawn by that time. Prices were beginning to soften slightly. Then again, they were hardly dropping at the rate that some of the media would have you believe. In any case, I started requesting regular offers from brokers. Initially, I was disappointed to find that many of the quotes remained quite pricy. Prices were nowhere near the level at which I had bought in 2004. In fact, they are still have not come down this far. Yet I am convinced that we have reached an attractive level that makes it worthwhile to shop around. In mid-april 2009, I was back in the market for a multifamily home buying at a multiple of 12 in a fair location in Charlottenburg. In all fairness I have to admit though that it took me several months to find just such a property to buy. Friends and colleagues keep asking me: So, is this the right time to start buying in Berlin? Having replied with an unequivocal Yes, I tend to add: Take leave of your pipedreams regarding prices. Even in Berlin, real estate will no longer sell for multiples of ten, unless you start hunting in very modest locations in Neukölln or Wedding. In fact, even there you would be likely to pay multiples of eleven or eleven-and-ahalf. Real estate in medium locations commands multiples of 13. If you add the ancillary acquisition costs (these being higher in Berlin than elsewhere in Germany), and then subtract non-recoverable service charges, rent default risks, etc. you still have 6.5 percent left, and this is not at all a bad return when assuming an interest debt of 4 percent. For me, it is important to know that there has been virtually no housing construction in Berlin for years, and that this is driving up rent rates. To be sure, rents will not soar the way some investors from Scandinavia, Ireland or the United Kingdom hoped for a few years back. But they are pushing up fast and will continue to do so. Low interest rates, rising rent rates, and a price level that undercuts that of two year ago by somewhere between two and three annual rents you would be hard pressed to find a better time to invest. So, if you keep waiting for prices to return to the level of 2004, chances are that you will wait in vain.
Berlin Residential Investment Market Issue 1 / May 2009 3 Market Performance Turning a Profit by Buying Right By Jürgen Michael Schick, MRICS Private investors worried by inflation have been showing a keener interest in rental housing in Berlin. Their efforts benefit from a gross initial yield of 7.6 percent on average. This interest rate equals a factor of 13, that is, the multiple commonly paid for combination residential/commercial buildings in the German capital. Until a year ago, the market was paced by international buyers and financial investors that considered real estate simply one investment vehicle among others. In terms of real estate sales, 2006 and 2007 became banner years for Berlin, yet in fall 2008, the market froze. The international financial crisis has sharpened the senses for the intrinsic value of secure tangible assets. Since the start of 2009, high net worth investors such as insurance companies and pension funds, as well as private buyers, benefit from attractive entry-level prices. Sales transactions residential and commercial buildings in Berlin reasonable risk/reward profiles. Anyone investing today brings a sizable share of equity to the job. This is money that wants to be invested in stable assets. Indeed, we are seeing a shift in trend toward safety. Property diligences have become very elaborate. Sellers are expected to provide transparent insights into a building s history and documents. And buyers are well advised to take the trouble to closely inspect a property. Which locations are promising a sound investment? In my estimate, it depends essentially on the actual micro location. Each district includes good and bad locations alike. Berlin s downtown district of Charlottenburg-Wilmersdorf with its population of 317,000 has as many residents as the former capital Bonn. Scouting the neighbourhood, the lettability of the apartments and business venues, and the infrastructure of the immediate surroundings helps to get a first idea of a given micro-location. It needs to be remembered that Berlin is also the nation s capital in terms of tenancy, as 86% of the population are renting their homes, more than in any other German city. And 90 percent of Berlin s tenants live in classic apartment buildings. Apartments in single-family homes and duplexes account for a share of barely 10 percent. So as landlord, you have a product to offer that is familiar to the overwhelming majority and very much in demand. Benchmark prices for residential and commercial rental real estate in Berlin by April 1, 2009 Source: Gutachterausschuss für Grundstückswerte in Berlin These new buyers have one thing in common: They form a class of real estate investors who are truly interested in the property as such. They take their cues from the location of a given property, its structural quality, and not least from the potential for rent increases. And they share another trait: Rather than pouncing on the cheapest property in a greed-driven approach for maximum return, they are looking for Source: Michael Schick Immobilien, IVD
Berlin Residential Investment Market Issue 1 / May 2009 4 On closing, let me add a word on prices: In Berlin s prime locations, the benchmark prices show multiples (the relation of rent revenues per year to purchase price) of 16.9 in the western districts. Properties of particularly high quality actually exceed this figure. In good locations, multiples of 14 have become realistic again, translating onto a gross yield of 7.1 percent. No other metropolis of any standing offers comparable prices at a time of growing population and rising rent revenues. For more background details and trends on Berlin s demographic development, be sure to read the next issue of Berlin Rental Housing. Portrait of a District City Life It stands no more than half as tall as the Eiffel Tower, and yet the vista from Berlin s radio tower is definitely worth a look. On clear days, the visitors platform 125 metres above the ground commands a breathtaking view of large parts of the city. Locally called Funkturm, the radio tower lies in the western part of Berlin, in the district of Charlottenburg- Wilmersdorf. With a population of 317,000 the district represents a city in its own right within the greater metropolis. Nothing reveals the district s diversity better than this bird s-eye view. Nature and urbane living appear to exist cheek by jowl. West of the radio tower District of Charlottenburg-Wilmersdorf seen as bird s eye view you see the woodlands of Grunewald. In the North, multi-family homes fringe the parklands of Charlottenburg Palace. Mansions and single-family homes define the southern part, while the East is teeming with the hustle and bustle of downtown. It is not incidental that the surroundings of Kurfürstendamm are often labelled City West. Here, on West Berlin s main boulevard you will find boutiques, cinemas, cabarets, and restaurants. It is equally attractive to tourists, shoppers, and night owls. Despite the fastpaced life on Ku damm as the Kurfürstendamm is commonly called, its quiet side streets are choice residential neighbourhoods. Here, you will find the lavish turn-of-the-century town houses with tall ceilings, generous staircases, and stucco facades that Berlin is known for. Higher Net Rents than Elsewhere in Berlin The vacancy rate for residential real estate in Charlottenburg-Wilmersdorf averages 3.1 percent, thus undercutting the all-berlin average of 4.5 percent. While the spending power of the local resident reflects the city s mean level, net rents of 661 Euro per apartment are entirely realistic, ranging substantially above the Berlin average of 476 Euros. The rent rate per square metre for re-lettings equalled 7.95 Euros during the second semester 2008, in top locations up to 14.90 Euros. Especially beyond the luxury segment, rent rates have plenty of upward potential left. The share of rental apartments in the housing stock as a whole equals about 90 percent. In the wake of the financial crisis, sales prices for apartments
Berlin Residential Investment Market Issue 1 / May 2009 5 dropped in Charlottenburg-Wilmersdorf as in the rest of Berlin, if on a more modest scale. Residential District with Intact Social Structure The popularity of Charlottenburg-Wilmersdorf as residential area is reflected in its demographic structure. Compared to the rest of Berlin, the socioeconomic data are favourable. Just 779 households drew rent allowances in 2007, out of a total of 24,000 recipients in all of Berlin. The only district reporting a lower number of subsidised apartments was Steglitz- Zehlendorf. The share of gainfully employed persons in Charlottenburg-Wilmersdorf s population stands at 43 percent, and thereby exceeds the city average. Although the unemployment rate was 17 percent in April 2009, the district is second only to Steglitz- Zehlendorf. The index is compiled on the basis of stats such as unemployment, life expectancy, educational structure, and demographic factors. Radio tower Berlin 2008 Social index for Berlin s districts 1. Steglitz-Zehlendorf 2. Charlottenburg-Wilmersdorf 3. Treptow-Köpenick 4. Pankow 5. Tempelhof-Schöneberg 6. Reinickendorf 7. Lichtenberg 8. Spandau 9. Marzahn-Hellersdorf 10. Friedrichshain-Kreuzberg 11. Neukölln 12. Mitte Europe s Biggest Café Charlottenburg-Wilmersdorf looks back on a longstanding tradition as choice residential area. The district actually two separate districts at the time experienced its first boom time in the 1920s. Berlin W as western downtown of Berlin was a promenade of international renown, featuring cinemas, theatres, cabarets, vaudeville theatres, and posh stores. If you wanted to see the historic Berlin, you went to Alexanderplatz and strolled back down Unter den Linden to the Brandenburg Gate. If you wanted to see modern Berlin, you went west. For the American writer Thomas Wolfe, Kurfürstendamm was Europe s biggest café back then. During the same period, the district became famous for its radio trade fairs at the fairground in the Westend. It is here that the radio tower was constructed in 1926, home to the world s first VHF TV broadcast some years later. Right next door, the AVUS proto-motorway was opened to public traffic in 1921. It doubled as a famous racetrack for many decades, and races took place here annually until 1998. Other landmarks of the district include Memorial Church on Breitscheidplatz, the zoo, the Olympic Stadium, home of first-league team Hertha BSC. Conspicuous edifices of the post-war period in Charlottenburg-Wilmersdorf are the Europa Center and International Congress Centrum, among others. The largest train station in the district, Zoo, attained sad notoriety in the 1980 as the setting of the bestselling book Christiane F.. With the University of Fine Arts and the University of Applied Sciences, two of Berlin s four universities are located in the district.
Berlin Residential Investment Market Issue 1 / May 2009 6 Charlottenburg: a Regal Name Testimony to the more remote history of Charlottenburg-Wilmersdorf is the district s coat of arms. Dominating the foreground is Charlottenburg Palace, definitive for the district s name, as it were. Originally, it bore the name of Lietzenburg Palace and served as summer residence of Sophie Charlotte, wife of Elector Frederick III who went on to become the Prussian King Frederick I. After his wife s passing in 1705, the King renamed the palace and the small settlement of court personnel Charlottenburg. In the late eighteenth century, the fledgling town became a popular destination for outings among Berliners. Pubs and beer gardens flourished. Attracted by the location, more and more affluent burghers relocated to Charlottenburg in the nineteenth century, among them Werner von Siemens in 1862, making Charlottenburg the wealthiest town in Prussia. By 1913, 120 millionaires were living in the lavish apartment buildings on Kurfürstendamm. View of Emperor William Memorial Church, landmark of City West Part of Berlin since 1920 Wilmersdorf and Charlottenburg were incorporated into Berlin in 1920. Taken together, the two new districts had a population of 400,000 at the time. It was in the wake of World War II, notably in the 1970s, that the population shrank dramatically. At the time of the district reform of January 1, 2001, just under 317,000 residents lived in Charlottenburg-Wilmersdorf. Figures released by Investitionsbank Berlin (IBB) suggest that the population has slightly increased since. According to the IBB, the upward demographic trend is expected to continue in the coming years. Population development in the district of Charlottenburg-Wilmersdorf Charlottenburg Palace Wilmersdorf, in turn, has a much older, predominantly rustic history. First mention of a settlement bearing this name is recorded for 1293. The hamlet was probably established by the von Wilmersdorff family in 1220. Three purple lilies in the present coat of arms of Charlottenburg-Wilmersdorf bear witness to that time. 317.500 317.000 316.500 316.000 315.500 315.000 314.500 314.000 313.500 314.712 315.080 315.557 316.887 2004 2005 2006 2007 Trend Proprietary Source: Bezirksamt Charlottenburg-Wilmersdorf
Berlin Residential Investment Market Issue 1 / May 2009 7 Apartment Buildings of the Month Refurbished Historic Building in Charlottenburg This combined residential/ commercial building is located close to Kaiserdamm and Lietzensee. The city orbital is minutes away, and public transportation (underground and bus) is just as Sales price: accessible. 2,050,000 plus 7.14% brokers commission The plot is developed as a Yield rate: residential and commercial 6.3% building with four upper floors, including a front building, a wing to the right and a back building. It has 29 residential and two commercial units. The attic could be developed. Heating and hot-water are supplied through gas-fired heating systems in each unit. The house comes with many original style elements and stucco ornaments. Fully Let Apartment Building in Kreuzberg This residential and commercial building is situated in a popular location in the district of Kreuzberg, between Zossener Strasse and Gneisenaustrasse. The Gneisenaustrasse underground Sales price: station lies within walking 1,.350,000 plus 7.14% distance. Just minutes away broker s commission Yield rate: are Landwehrkanal and the 7.1% popular Urbanhafen with its restaurants and pubs. Also within easy walking distance is the quarter around Bergmannstrasse. The plot is developed with a combination residential/commercial building, including a side building. At present, all apartments and commercial units are let. The property is in excellent refurbished condition. All apartments feature hardwood or plank flooring. The apartment units on the attic floor have a high-end finish and command a sweeping view of the surrounding rooftops. The property can be acquired as share or asset deal. Three Historic Stucco Buildings in Tiergarten This apartment building is located on a quiet, popular residential street in Moabit, which is part of Berlin s Mitte district. The Birkenstrasse underground station lies within walking distance, the Beusselstrasse urban transit station is also just minutes away. Various convenience stores are found on the Turmstrasse shopping street close by. The plot is developed with three freestanding buildings, arranged in a row, and two outbuildings. The total number of rental units is 44, which breaks down into two commercial and 42 residential units. The property is sold in fully let condition. The average rent currently approximates 6.50 Euros. All apartments have been upgraded and are in generally sound condition. Sales price: 2,050,000 plus 7.14% broker s commission Yield rate: 6.3% Imprint Dr. ZitelmannPB. GmbH, Rankestrasse 17, 10789 Berlin Authorised representative: Dr. Rainer Zitelmann Commercial register no.: HRB: 76 460 Michael Schick Immobilien, Rheinbabenallee 40, 14199 Berlin Authorised representative: Jürgen Michael Schick Phone: +49 (0)30 / 254 93 167 E-mail: info@berliner-zinshaeuser.de Photos: Dr. ZitelmannPB. GmbH, Michael Schick Immobilien, Shutterstock, Fotolia (ArTo, Carsten Jacobs, Increa, Kalle Kolodziej, Laurie Scheuermann, lekcets, Pixelbube, Thomas Röske)